Progressive drawdown means you borrow funds in stages as the build progresses, not as a lump sum upfront.
Most construction lenders release capital against a fixed price building contract tied to five or six progress claims. You only pay interest on what's been drawn, which keeps repayments manageable during the build. The builder submits a progress claim, the lender arranges a progress inspection, and once the work matches the claim, funds release directly to the builder. Each drawdown attracts a fee, typically $300 to $500 per claim, and most lenders cap the total number of draws to keep admin costs contained.
How the Drawdown Schedule Aligns With Building Stages
The progress payment schedule is fixed in the building contract before the loan settles. Standard residential contracts follow a base-slab-frame-lockup-fixing-completion structure, though some lenders allow seven stages for larger projects. The contract defines the percentage due at each stage, and the lender matches that schedule in the loan terms. If your builder requests a deposit before slab pour that isn't in the approved schedule, the lender won't fund it. Any variation needs written agreement from both builder and lender before the next claim.
Consider a Park Orchards client building a custom design on a subdivided block. The builder proposed a seven-stage schedule with 10% deposit, but the lender's policy capped it at six draws. The builder amended the contract to combine base and slab into a single 25% claim, keeping the project compliant without renegotiating the fixed price. The loan settled, the first draw released on base-slab completion, and repayments stayed interest-only on the amount drawn until the final stage.
Interest-Only Repayments on Drawn Amounts
You pay interest monthly on the cumulative amount released, not the total approved loan amount. If you've drawn $200,000 from a $600,000 facility, interest applies to $200,000. Once the next claim releases another $100,000, repayments adjust to cover $300,000. Lenders calculate interest daily on the drawn balance, so timing between claims matters if you're managing cash flow across multiple projects or holding other investment debt.
Most lenders offer interest-only repayment options during construction, reverting to principal-and-interest once the final drawdown clears and the loan converts to a standard mortgage. That conversion happens automatically at practical completion, and the rate typically shifts from the construction loan interest rate to the lender's standard variable or fixed rate depending on what you've locked in. If you're refinancing post-completion, the conversion date triggers your six-month refinance window before break costs apply on any fixed component.
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What Lenders Charge Per Drawdown and Inspection
The Progressive Drawing Fee covers the lender's admin and the third-party progress inspection. Fees range from $300 to $500 per claim, charged at the time of each release. A six-stage build incurs $1,800 to $3,000 in total drawdown fees, separate from the upfront application and settlement costs. Some lenders cap the fee structure at five stages, which forces builders to consolidate claims if the contract runs longer.
Inspections are non-negotiable. The lender appoints a quantity surveyor or building inspector who verifies that the completed work matches the claimed percentage. If the inspector identifies incomplete work or defects, the lender holds the funds until the builder rectifies the issue. This protects you from paying for work not yet delivered, but it also means your builder needs to stay on schedule and meet the contract spec at each stage to avoid delays.
Land and Construction Package vs Separate Land Purchase
A land and construction package combines the land purchase and building contract into a single loan with one settlement. The lender funds the land component first, then holds the construction portion in reserve for progressive release. This structure works for house & land packages or off the plan finance where the developer coordinates both elements. Separate land purchase means you settle the land with one loan, then apply for construction funding later once council approval and the fixed price building contract are finalised.
Park Orchards sits in an area with larger blocks and frequent subdivisions, so many clients buy suitable land first, hold it while they finalise council plans and engage a registered builder, then apply for the construction loan six to twelve months later. That timing gap matters because lenders require you to commence building within a set period from the Disclosure Date, usually six months. If council approval drags or the builder's schedule pushes out, the loan offer lapses and you reapply under current policy and rates.
Owner Builder and Cost Plus Contract Limitations
Most mainstream lenders won't fund owner builder finance unless you hold a registered builder's license and can demonstrate prior completed projects. The risk profile is too high, and the progress inspection process breaks down when the borrower is also the builder. If you're coordinating trades yourself to save on builder margins, you'll need a specialist lender at a higher rate, typically 1% to 2% above standard construction loan interest rates, with stricter drawdown conditions and higher equity requirements.
Cost plus contracts, where the builder charges actual costs plus a margin rather than a fixed price, also face limited lender appetite. Fixed price contracts give the lender certainty on total exposure and make the progress payment schedule enforceable. Cost plus introduces variation risk that most lenders won't carry without a capped contract sum and detailed quantity surveyor sign-off at each stage. If you're building a high-spec custom home with architectural features that can't be priced upfront, expect to show at least 30% equity and accept a higher rate or reduced loan amount to offset the lender's uncertainty.
When the Build Runs Over Budget or Behind Schedule
If your builder goes insolvent mid-project, the lender holds the undrawn portion and won't release it to a replacement builder without reapplication and revaluation. You'll need to find a new registered builder willing to complete the project, submit a revised fixed price contract for the remaining work, and the lender will assess whether the undrawn funds cover completion. If they don't, you'll need to inject additional equity or secure a top-up, which may not be possible if the incomplete build has reduced the property's as-is value below the original land-plus-construction valuation.
Budget blowouts from client-initiated variations are separate. If you add $50,000 in upgrades after the loan settles, the lender won't increase the facility without a formal variation application, revaluation, and credit reassessment. The builder will expect payment outside the progress payment schedule, so you fund variations from savings or other sources. That's why locking your design and spec before the construction loan application prevents cash flow gaps during the build.
Call one of our team or book an appointment at a time that works for you to discuss your construction loan structure and confirm your builder and contract meet lender requirements before you commit to the project.
Frequently Asked Questions
How does progressive drawdown work on a construction loan?
Lenders release funds in stages as the build progresses, matched to the progress payment schedule in your fixed price building contract. You only pay interest on the amount drawn down at each stage, not the total approved loan amount.
What fees do lenders charge for each construction drawdown?
Most lenders charge a Progressive Drawing Fee of $300 to $500 per claim to cover admin and the progress inspection. A standard six-stage build incurs $1,800 to $3,000 in total drawdown fees.
Can I use a construction loan if I'm an owner builder?
Most mainstream lenders require you to hold a registered builder's license and demonstrate prior completed projects. Without those credentials, you'll need a specialist lender at a higher rate with stricter conditions.
What happens if my builder goes insolvent during the build?
The lender holds the undrawn portion and won't release it to a replacement builder without reapplication and revaluation. You'll need a new fixed price contract for the remaining work, and the lender will assess whether the undrawn funds cover completion.
Do I pay principal and interest during construction?
Most construction loans are interest-only during the build, with repayments calculated on the cumulative drawn amount. Once the final drawdown clears at practical completion, the loan converts to principal-and-interest repayments.
